Chapter | The Palgrave Encyclopedia of Strategic Management | 2015

Network Effects

by Andrei Hagiu and David B. Yoffie

Abstract

Network effects are a key economic and strategic phenomenon in 'new economy' industries. They can, but do not necessarily, lead to market tipping, unless they outweigh customers' benefits from differentiation and are accompanied by high switching and multi-homing costs. Network effects create the possibility for multiple equilibrium market configurations, which are crucially determined by market participants' EXPECTATIONS. While in some markets network effects are exogenously given, in other markets their existence and magnitude is endogenously determined by firms' strategic choices.

Keywords: Network Effects;

Citation:

Hagiu, Andrei, and David B. Yoffie. "Network Effects." In The Palgrave Encyclopedia of Strategic Management, edited by Mie Augier and David J. Teece. Palgrave Macmillan, forthcoming. (Published online October 2013.)